How to Use Earnings Season to Trounce the Market
By Chad Shoop.
Every three months, thousands of public companies go through the quarterly ritual of “reporting their numbers.” It’s a kimono-opening exercise in which CEOs and CFOs and others in corporate management release the company’s latest financial results to Wall Street. In these moments, it’s an opportunity for a company to share their performance.
Investors have long tried to benefit from this key event by placing bets ahead of an earnings report. And this will give you an occasional home run, the amount of risk and gambling involved makes it nearly impossible to profit in the long run.
That’s because even though there are only three possibilities during an earnings report – either a company will meet, miss, or beat Wall Street’s earnings expectations – the market’s reaction to the report is a whole other beast.
It will dive, it will surge or investors will yawn at the latest quarterly figures regardless of whether or not the report meets, misses or beats expectations. And it’s this “earnings drift” that makes earnings season, as it’s known on the Street, particularly interesting.
Especially if you know how to play it. Because this “drift” is actually far more predictable and easier to profit from than front-running an earnings report.
You see, academics who study the market at ivory-tower universities have long known that the initial reaction to a favorable or miserable earnings report can result in a “drift” – a situation in which the shares move in a particular direction over a certain amount of time because of the impact of the earnings report. Even more, they know that the initial reaction actually helps determine what type of earnings drift we’ll see.
In fact, this trading pattern has existed for decades. However, it has yet to be exploited by mainstream investors due to the immense data mining needed to uncover these drifts.
But now, I have done all the legwork for you, and it’s a trading pattern you can easily exploit for profits in my advisory service Earnings Drift.
Investing has consumed my life since college. While double majoring in finance and economics at the University of North Carolina at Greensboro, I founded the university’s economics club, joined the finance club and participated in the Chartered Financial Analyst research competition to represent our school.